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1 ECONOMICS Time allowed : 3 hours Maimum Marks : 100 General Instructions: (i) (ii) (iii) (iv) (v) (vi) All questions in both the sections are comulsor. Marks for questions are indicated against each question. Question Nos. 1-3 and are ver short-answer questions carring 1mark each. The are required to be answered in one sentence each. Question Nos. 4-8 and are short-answer questions carring 3 marks each. Answer to them should normall not eceed 60 words each. Question Nos and are also short-answer questions carring 4 marks each. Answer to them should normall not eceed 70 words each. Question Nos and are long-answer questions carring 6 marks each. Answer to them should normall not eceed 100 words each. (vii) Answers should be brief and to the oint and the above word limits should be adhered to as far as ossible. QUESTION PAPER CODE 58/1/1 SECTION - A 1. Give equation of Budget Line When income of the consumer falls the imact on rice-demand curve of an inferior good is : (choose the correct alternative) (a) (b) (c) Shifts to the right. Shifts to the left. There is uward movement along the curve. (d) There is downward movement along the curve

2 3. If Marginal Rate of Substitution is constant throughout, the Indifference curve will be : (choose the correct alternative) 1 (a) (b) (c) (d) Parallel to the -ais. Downward sloing concave. Downward sloing conve. Downward sloing straight line. 4. Giving reason comment on the shae of Production Possibilities curve based on the following schedule: 3 Good X (units) Good Y (units) What will be the imact of recentl launched 'Clean India Mission' (Swachh Bharat Mission) on the Production Possibilities curve of the econom and wh? 3 Or What will likel be the imact of large scale outflow of foreign caital on Production Possibilities curve of the econom and wh? 6. The measure of rice elasticit of demand of a normal good carries minus sign while rice elasticit of sul carries lus sign. Elain wh? 3 7. There are large number of buers in a erfectl cometitive market. Elain the significance of this feature

3 8. Elain the effects of 'maimum rice ceiling' on the market of a good. Use diagram. 3 For the blind candidates onl in lieu of Q. No.8. What is rice ceiling? Elain the effects of maimum rice ceiling. 9. A consumer sends Rs on a good riced at Rs. 8 er unit. When rice rises b 25 er cent, the consumer continues to send Rs on the good. Calculate rice elasticit of demand b ercentage method Define cost. State the relation between marginal cost. and average variable cost. 4 Or Define revenue. State the relation between marginal revenue and average revenue. 11. A consumer consumes onl two goods X and Y both riced at Rs. 3 er unit. If the consumer chooses a combination of these two goods with Marginal Rate of Substitution equal to 3, is the consumer in equilibrium? Give reasons. What will a rational consumer do in this situation? Elain. 6 Or A consumer consumes onl two goods X and Y whose rices are Rs. 4 and Rs. 5 er unit resectivel. If the consumer chooses a combination of the two goods with marginal utilit of X equal to 5 and that of Y equal to 4, is the consumer in equilibrium? Give reasons. What will a rational consumer do in this situation? Use utilit analsis. 12. State the different hases of changes in Total Product and Marginal Product in the Law of Variable Proortions. Also show the same in a single diagram. 6 For the blind candidates in lieu of Q. No. 12 onl. State, on the basis of a numerical eamle, different hases of changes in Total Product and Marginal Product in the Law of Variable Proortions Wh is the equalit between marginal cost and marginal revenue necessar for a firm to be in equilibrium? Is it sufficient to ensure equilibrium? Elaain

4 14. Market for a good is in equilibrium. The demand for the good 'increases'. Elain the chain of effects of this change. 6 SECTION B 15. What is 'aggregate sul' in macroeconomics? The value of multilier is : (choose the correct alternative) 1 (a) (b) (c) (d) 1 MPC 1 MPS 1 1 MPS 1 MPC Borrowing in government budget is : (choose the correct alternative) 1 (a) (b) (c) (d) Revenue deficit Fiscal deficit Primar deficit Deficit in taes 18. The non-ta revenue in the following is : (choose the correct alternative) 1 (a) (b) (c) (d) Eort dut Imort dut Dividends Ecise 274

5 19. Other things remaining unchanged, when in a countr the rice of foreign currenc rises, national income is : ( choose the correct alternative) 1 (a) (b) (c) (d) Likel to rise Likel to fall Likel to rise and fall both Not affected 20. If Real GDP is Rs. 200 and Price Inde (with base = 100) is 110, calculate Nominal GDP Name the broad categories of transactions recorded in the 'caital account' of the Balance of Paments Accounts. 3 Or Name the broad categories of transactions recorded in the 'current account' of the Balance of Paments Accounts. 22. Where will sale of machiner to abroad be recorded in the Balance of Paments Accounts? Give reasons Elain the 'bank of issue' function of the central bank. 4 Or Elain 'Government's Bank' function of central bank. 24. Government of India has recentl launched 'Jan-Dhan Yojna' aimed at ever household in the countr to have at least one bank account. Elain how deosits made under the lan are going to affect national income of the countr An econom is in equilibrium. Calculate national Income from the following: 4 Autonomous consumtion =

6 Marginal roensit to save = 0.2 Investment eenditure = Giving reason elain how should the following be treated in estimation of national income : (i) (ii) (iii) Eenditure b a firm on ament of fees to a chartered accountant Pament of cororate ta b a firm Purchase of refrigerator b a firm for own use 27. Elain the concet of Inflationar Ga. Elain the role of Reo Rate in reducing this ga. 6 Or Elain the concet of Deflationar Ga and the role of 'Oen Market Oerations' in reducing this ga. 28. Elain the role the government can la through the budget in influencing allocation of resources Calculate National Income and Personal Disosable Income : (Rs. crores) (i) Personal ta 80 (ii) Private final consumtion eenditure 600 (iii) Undistributed rofits 30 (iv) Private income 650 (v) Government final consumtion eenditure

7 (vi) Cororate ta 50 (vii) Net domestic fied caital formation 70 (viii) Net indirect ta. 60 (i) Dereciation 14 () Change in stocks (-)10 (i) Net imorts 20 (ii) Net factor income to abroad 10 QUESTION PAPER CODE 58/1 SECTION - A 1. Define indifference curve If due to fall in the rice of good X, demand for good Y rises, the two goods are: (Choose the correct alternative) 1 (a) (b) (c) (d) Substitutes Comlements Not related Cometitive 3. If Marginal Rate of Substitution is increasing throughout, the Indifference Curve will be : (Choose the correct alternative) 1 (a) (b) (c) (d) Downward sloing conve Downward sloing concave Downward sloing straight line Uward sloing conve 277

8 4. Giving reason comment on the shae of Production Possibilities Curve based on the following schedule : 3 Good X (units) Good Y (units) What is likel to be the imact of "Make in India" aeal to the foreign investors b the Prime Minister of India, on the roduction ossibilities frontier of India?Elain. What is likel to be the imact of efforts towards reducing unemloment on the roduction otential of the econom? Elain Elain the significance of 'minus sign' attached to the measure of rice elasticit of demand in case of a normal good, as comared to the 'lus sign' attached to the measure of rice elasticit of sul In a erfectl cometitive market the buers treat roducts of all the firms as homogeneous. Elain the significance of this feature What are the effects of 'rice-floor' (minimum rice ceiling) on the market of a good? Use diagram. 3 Note: The following question is for the Blind Candidates onl. in lieu of Q.No.8. Elain the effects of 'rice-floor' (minimum rice ceiling) on the market of a good

9 9. A consumer sends ` 1,000 on a good riced at ` 10 er unit. When its rice falls b 20 ercent, the consumer sends ` 800 on the good. Calculate the rice elasticit of demand b the Percentage method What is the behaviour of (a) Average Fied Cost and (b) Average Variable Cost as more and more units of a good are roduced? Define Average Revenue. Show that Average Revenue and Price are same A consumer consumes onl two goods X and Y, both riced at ` 2 er unit. If the consumer chooses a combination of the two goods with Marginal Rate of Substitution equal to 2, is the consumer in equilibrium? Wh or wh not? What will a rational consumer do in this situation? Elain. A consumer consumes onl two goods X and Y whose rices are ` 5 and ` 4 resectivel. If the consumer chooses a combination of the two goods with marginal utilit of X equal to 4 and that of Y equal to 5, is the consumer in equilibrium? Wh or wh not? What will a rational consumer do in this situation? Use utilit analsis What are the different hases in the Law of Variable Proortions in terms of marginal roduct? Give reason behind each hase. Use diagram. 6 Note: The following question is for the Blind Candidates onl in lieu of Q.No.12. Elain with the hel of a numerical eamle different hases in the Law of Variable Proortions Elain wh will a roducer not be in equilibrium if the conditions of equilibrium are not met Market for a good is in equilibrium. The sul of good "decreases". Elain the chain of effects of this change

10 SECTION B 15. What is 'aggregate demand' in macroeconomics? If MPC = 1, the value of multilier is: (Choose the correct alternative) 1 (a) 0 (b) 1 (c) Between 0 and 1 (d) Infinit 17. Primar deficit in a government budget is(choose the correct alternative) 1 (a) (b) (c) (d) Revenue eenditure - Revenue receits Total eenditure - Total receits Revenue deficit - Interest aments Fiscal deficit - Interest aments 18. Direct ta is called direct because it is collected directl from: (Choose the correct alternative) 1 (a) (b) (c) (d) The roducers on goods roduced The sellers on goods sold The buers of goods The income earners 19. Other things remaining the same, when in a countr the market rice of foreign currenc falls, national income is likel : (Choose the correct alternative) 1 (a) (b) (c) (d) to rise to fall to rise or to fall to remain unaffected 280

11 20. If the Real GDP is ` 400 and Nominal GDP is ` 450, calculate the Price Inde (base = 100) What are fied and fleible echange rates? 3 Elain the meaning of Managed Floating Echange Rate. 22. Where is 'borrowings from abroad' recorded in the Balance of Paments Accounts? Give reasons Elain the "Bankers' Bank function" of the central bank. 4 Elain the "Bank of Issue function" of the central bank. 24. Currenc is issued b the central bank, et we sa that commercial banks create mone. Elain. How is this mone creation b commercial banks likel to affect the national income? Elain An econom is in equilibrium. Calculate the Investment Eenditure from the following : 4 National Income = 800 Marginal Proensit to Save = 0 3 Autonomous Consumtion = Giving reason elain how the following should be treated in estimation of national income : 6 (i) (ii) (iii) Pament of interest b a firm to a bank Pament of interest b a bank to an individual Pament of interest b an individual to a bank 281

12 27. What is 'deficient demand'? Elain the role of 'Bank Rate' in removing it. 6 What is 'ecess demand'? Elain the role of 'Reverse Reo Rate' in removing it. 28. Elain how the government can use the budgetar olic in reducing inequalities in incomes Calculate the 'National Income' and 'Private Income' : 6 (` crores) (i) Rent 200 (ii) Net factor income to abroad 10 (iii) National debt interest 15 (iv) Wages and salaries 700 (v) Current transfers from government 10 (vi) Undistributed rofits 20 (vii) Cororation ta 30 (viii) Interest 150 (i) Social securit contributions b emloers 100 () Net domestic roduct accruing to government 250 (i) Net current transfers to rest of the world 5 (ii) Dividends

13 Marking Scheme Economics General Instructions 1. Please eamine each art of a question carefull and then allocate the marks allotted for the art as given in the marking scheme below. TOTAL MARKS F ANY ANSWER MAY BE PUT IN A CIRCLE ON THE LEFT SIDE WHERE THE ANSWER ENDS. 2. Eected suggested answers have been given in the Marking Scheme. To evaluate the answers the value oints indicated in the marking scheme be followed. 3. For questions asking the candidate to elain or define, the detailed elanation and definition have been indicated alongwith the value oints. 4. For mere arithmetical errors, there should be minimal deduction. Onl ½ mark be deducted for such an error. 5. Wherever onl two / three or a "given" number of eamles / factors / oints are eected onl the first two / three or eected number should be read. The rest are irrelevant and must not be eamined. 6. There should be no effort at "moderation" of the marks b the evaluating teachers. The actual total marks obtained b the candidate ma be of no concern to the evaluators. 7. Higher order thinking abilit questions are assessing student's understanding / analtical abilit. General Note : In case of numerical question no mark is to be given if onl the final answer is given. QUESTION PAPER CODE 58/1/1 Q.No. EXPECTED ANSWERS/VALUE POINTS Distribution of marks Section A = m 1 2 (a) Shifts to the right. 1 3 (d) Downward sloing straight line 1 283

14 4 Good X GoodY (Units) (Units) MRT Y:1X 2 7 2Y:1X 3 4 3Y:1X 4 0 4Y:1X l½ Since MRT is increasing, the PP curve is downward sloing and Concave to the origin. l½ (Diagram not required) 5 Cleanliness reduces chances of eole falling ill and, thus can ensure better health. This in turn will reduce forced absenteeism from work, raise efficienc level and thus raise countr's roduction otential. Rise in this otential shifts PP curve to the right. 3 (Diagram not required) Large scale outflow of foreign caital from the econom will reduce resources and thus roduction otential of the countr will fall. Fall in roduction otential in turn will shift the PP-Curve downwards. 3 (Diagram not required) 6 The measure of rice elasticit of demand has a minus sign because there is inverse relation between rice and demand of a normal good, while the measure of rice elasticit of sul has lus sign because there is direct relation between rice and sul of a good. 3 7 The feature signifies that the number of buers in a erfectl cometitive market is so large that an individual buer is not in a osition to influence the market rice on its own b urchasing more or less. It is because the individual buer's share in total urchase in the market is insignificant

15 8 1 Maimum rice ceiling refers to imosition of uer limit on the rice of a good b the government. For eamle, in the diagram OP is rice ceiling while equilibrium rice is OP 1. At this rice the roducers are willing to sul onl PA (Or OQ 1 ) while consumers demand PB (Or OQ 2 ). The effect of the ceiling is that shortage, equal to AB (O 1 Q 2 ) is created, which ma further lead to black marketing. 2 For blind Candidates Onl: Price ceiling means utting the uer limit b the government on the rice that can be charged b the roducers of a good from the buers. 1 Maimum rice ceiling, is lower than equilibrium rice, leads to rise in demand and fall in sul. This creates shortage of the good in the market. This ma lead to black marketing. 2 9 Price E. Demand ½ E Q 1 Q P = = 0.8 ½ 10 Cost in economics refers to the sum of actual mone eenditure on inuts and the imuted eenditure in the form of inuts sulied b the owners including normal rofit

16 If MC < AVC, then AVC falls If MC = AVC, then AVC is constant If MC > AVC, then AVC rises (Diagram not required) 3 Revenue in Economics refers to the market value of outut roduced Or receits from sale of outut roduced. 1 If MR > AR, AR rises If MR = AR, AR is constant If MR < AR, AR Falls. (Diagram not required) 3 11 Given P = 3, P = 3 and MRS = 3, A consumer is said to be in equilibrium when MRS = Substituting values we find that 3 > 3 3 i.e. MRS > Therefore consumer is not in equilibrium. MRS > means that consumer is willing to a more for one more unit of X as comared to what market demands. 3 - The consumer will bu more units of X. - As a result MRS will fall due to the Law of Diminishing Marginal Utilit - This will continue till MRS = and consumer is in equilibrium (Diagram not required) 3 286

17 Given P = 4, P = 5 and MU = 5, MU = 4,a consumer will be in equilibrium when MU MU Substituting values, we find that Or 5 MU MU 3 Since er ruee MU is higher than er ruee MU, consumer is not in equilibrium. The consumer will bu more of X and less of Y. As a result MU will fall and MU will rise. The reaction will continue till MU and MU are equal and consumer is in equilibrium The Phases are: Phase : I TP rises at increasing rate i.e. uto A in diagram. MP rises i.e. uto 'a' Phase : II TP rises at decreasing rate i.e. between A and B. MP falls and remains ositive between 'a' and 'b'. Phase : III TP falls i.e. after B. MP falls and is negative i.e. after 'b' (Diagram on single ais is also correct) 287

18 For blind Candidates Onl: Variable inut TP MP (Units) (Units) (Units) Or an other relevant numerical eamle Phases: (1) TP increases at increasing rate and MP rises uto 2 units. (2) TP increases at decreasing rate and MP falls but remains ositive from 3 to 3 5 units. (3) TP falls and MP becomes negative from 6 unit onwards. 13 The roducer's equilibrium conditions are: (i) MC = MR and (ii) MC > MR after equilibrium. Suose MC > MR. In this situation it will be rofitable for the firm to roduce more or less deending uon relative changes in MC and MR till MC = MR. 3 Suose MC < MR. It will be rofitable for the roducer to roduce more till MC = MR. MC= MR is not a sufficient condition to ensure equilibrium. Given MC = MR, suose the behaviour of MC and MR is such that if one more unit is roduced. MC becomes less than MR. Then in this case it will be rofitable for the firm to roduce more. Therefore, in this case though MC = MR the roducer is not in equilibrium. However, if after MC = MR outut MC becomes greater than MR, it will be most advantageous for the firm to roduce onl uto MC = MR. 3 (Diagram not required) 288

19 14 - Given equilibrium, demand increases. - Price remaining unchanged, ecess demand emerges. - This leads to cometition among buers causing rice to rise. - Rise in rice causes fall (contraction) in demand and rise (eansion) in sul. - The rice continues to rise till the market is in equilibrium again at a higher rice 6 (Diagram not required) SECTION - B 15 Aggregate sul is the value of total quantit of final goods and services lanned to be roduced in an econom during a eriod (b) 1 MPS 1 17 (b) Fiscal deficit 1 18 (e) Dividends 1 19 (a) Likel to rise 1 20 Real GDP = Nominal GDP Price Inde 100 1½ Nominal GDP 200 = Nominal GDP = ½ (No marks if onl the final answer is given) 21 (1) Borrowings from and to abroad (2) Investments from and to abroad. (3) Decreases and increases in foreign echange reserves

20 (1) Eorts and imorts of goods (2) Eorts and imorts of services (3) Factor income receits from abroad and aments to abroad. 1 3 (4) Transfers from and to abroad. (An Three) 22 Sale of machiner to abroad is eort of goods and thus recorded in the Current Account. Sale of machiner to abroad brings in foreign echange and thus recorded on the credit side. 1½ 1½ (No marks if the reasons are not given) 23 The central bank is the sole authorit for the issue of currenc in the countr. It romotes efficienc in the financial sstem. Firstl, because it leads to uniformit in the issue of currenc, Secondl, because it gives Central Bank control over mone sul. 4 The Central Bank acts as a banker to the government. The central bank accets receits and makes aments for the government and carries out echange, remittance and other normal banking oerations for the government. The central bank manages ublic debt and also lends to government. 4 (To be marked as a whole) 24 - Oening more bank accounts means more bank deosits. - More deosits means increase in the lending caacit of the commercial banks. - More lending b banks means more investment in the countr. 4 - More investment means more national income. 25 Y = C + M P C (Y) + 1 1½ Y = (1 0.2) Y

21 0.2Y = 300 Y = 1500 ½ (No marks if onl the final answer is given) 26. (i) Pament of fees to chartered accountant b a firm is intermediate cost to the firm and, therefore not included. 2 (ii) (iii) Pament of cororate ta b a firm is a transfer ament and thus not included. 2 Purchase of a refrigerator b a firm for own use is investment eenditure and thus included. (No marks if reason is not given) 2 27 The Inflationar Ga is the amount b which the aggregate demand eceeds aggregate sul at the full emloment level. It is called inflationar because it leads to rise in rice level. 2 Beo Rate is the rate of interest at which central bank lends to commercial banks for a short eriod. When central bank raises Reo Rate, the borrowings b the commercial banks become costl. This forces the commercial banks to raise their lending rates. Peole borrow less, and therefore send less. This hels in reducing inflationar ga. 4 (Diagram not required) Deflationar Ga is the amount b which the aggregate demand falls short of aggregate sul at the full emloment level. It is called deflationar because it leads to a fall in rice level. (Diagram not required) 2 Oen Market Oerations refer to buing and selling of government securities b the central bank in the oen market. Central bank can reduce deflationar ga b buing securities. Those who sell receive aments b cheques from the central bank. The mone flows out from Central bank into the commercial banks. This raises lending caacit of commercial banks. Banks lend more. Sending rises which reduces deflationar ga

22 28 Government can influence allocation of resources b influencing market mechanism through taes, subsidies and direct articiation in roduction. Heav taes can be imosed on roduction units engaged in roducing harmful roducts like liquor, cigarettes etc. Ta concessions and subsidies can be given to encourage roduction of roducts useful for the masses. Government can directl roduce goods and services normall ignored b the rivate sector due to lack of enough rofits. 6 (To be marked as a whole) 29 N.I. = ii + v + (vii + ) i viii ii 1½ = ( 10) = Rs. 670 Crore. ½ PDI = iv vi iii i 1½ = = Rs. 490 Crore ½ (No marks if onl the final answer is given) QUESTION PAPER CODE 58/1 Q.No. EXPECTED ANSWERS/VALUE POINTS Distribution of marks Section A 1 It is the locus of oints reresenting such bundles of two goods, among which the consumer is indifferent. 1 2 (b) Comlements 1 3 (b) Downward sloing concave. 1 4 Good X Good Y (Units) (Units) MRT

23 1 27 3Y:1X Y:1X Y:1X Y:1X 1½ Since MRT is increasing, the PP curve is downward sloing concave to the origin. 1½ (Diagram not required) 5 'Make in India' aeal signifies invitation to foreign roducers to roduce in India. This will lead to increase in resources thus raising roduction otential of the countr. As a result PP curve will shift uwards. 3 (Diagram not required) Reducing unemloment has no effect on the roduction otential of the countr. It is because roduction otential is determined assuming full emloment. 3 Unemloment indicated that the countr is oerating below otential. Reducing unemloment siml hels in reaching otential. (Diagram not required) 6 The measure of rice elasticit of demand has a minus sign because there is inverse relation between rice and demand of a normal good, while the measure of rice elasticit of sul has lus sign because there is direct relation between rice and sul of a good. 3 7 This imlies that buers do not differentiate between roducts of different firms in the industr. As such the are willing to a onl the same rice for the roducts of all the firms. As a result a uniform rice revails in the market When government imoses lower limit on a rice that ma be charged for a articular good or service, it is called minimum rice ceiling e.g. rice OP 1. At this rice the roducers are willing to sul P 1 B or (OQ 2 ) While consumers demand onl P 1 A (=OQ 1 ). Unable to sell all the want to sell, the roducers ma tr to illegall sell below the minimum rice. (Answer based on minimum wages is also correct) 2 293

24 1 For blind Candidates Onl: When government imoses a lower limit on a rice that ma be charged b the roducers of a good or service, it is called rice floor. 1 Since this rice is above the equilibrium rice, at this rice roducers are willing to sul more but the buers are willing to bu less. This creates surlus in the market. Due to this roducers ma adot illegal was and sell the roduct or service at a lower rice. 2 9 Price E. Demand ½ E Q 1 Q P = = 0 ½ 10 (a) AFC falls continuousl as more and more outut is roduced. 2 (b) AVC falls initiall and after a level of outut, starts rising as more and more outut is roduced. 2 Average revenue equals Total Revenue divided b the outut roduced

25 TR = P Q 1 AR = Q TR And AR = P Q Q = P 3 11 Given P = 2, P = 2 and MRS = 2, A consumer is said to be in equilibrium when MRS = P P Substituting the values we find that 2 2 > 2 i.e. MRS > P P Therefore, consumer is not in equilibrium. MRS > P Pmeans that consumer is willing to a more for one more unit of X as 3 P comared to what the market demands. The consumer will bu more and more of X. As a result MRS will fall due to the Law of Diminishing Marginal Utilit. This will continue till MRS = P and consumer is in equilibrium. P (Diagram not required) 3 Given P = 5, P = 4 and MU = 4, MU = 5, the consumer will be in equilibrium when MU MU 295

26 substituting values, we find that Or MU MU 3 The consumer is not in equilibrium. Since er ruee MU is lower than er ruee MU, the consumer will bu less of and more of. As a result due to Law of Diminishing Marginal Utilit, MU will rise and MU will fall till 3 MU (Diagram not required) MU 12 The Phases are : Phase: I MP rises uto A Phase: II MP falls but is ositive i.e. between A and B. Phase: III MP falls and is negative i.e. after B 1½ Reasons Phase I : Initiall variable inut is too small as comared to the fied inut, As roduction is increased there is secialization of variable inuts and efficient use of the fied inut leading to rise in roductivit of the variable inut. As a result MP rises. 3 Phase II : After a level of outut a ressure on fied inut leads to fall in roductivit of the variable inut. MP starts falling but remains ositive. Phase III : The amount of variable inut becomes too large in comarison to the fied inut causing decline in total roduct. MP becomes negative 296

27 1½ For blind Candidates Onl: Variable inut TP MP (Units) (Unit) (Unit) 1½ Phases: (1) TP increases at increasing rate uto 2 units. (2) TP increases at decreasing rate uto 5 units. (3) TP falls from 6 unit onwards. ½ 3 Causes: Same as above 3 297

28 13 The equilibrium conditions are: (i) MC = MR and (ii) MC > MR after equilibrium Suose MC = MR condition is not met. Let MC > MR. In this it will be rofitable for the firm to roduce more or less deending uon the relative changes in MC and MR till MC = MR. Similarl, if MC < MR it will also be rofitable to roduce more till MC = MR. 3 Now Suose 'MC > MR after equilibrium condition is not met' and MC < MR after equilibrium. In this case the firm will not be in equilibrium, because it can increase its rofits b roducing more. 3 (Diagram not required) 14 - Given equilibrium, Sul 'decreases'. - Price remaining unchanged, ecess demand emerges. - Ecess demand leads to cometition between buers causing rice to rise. - Rise in rice causes fall (contraction) in demand and rise (eension) in sul. - Rise in rice continues till the market is in equilibrium again at a higher rice. (Diagram not required) 6 SECTION - B 15. Value of final roducts the buers are lanning to bu during a given eriod at a given level of income (d) infinit 1 17 (d) Fiscal deficit Minus interest ament 1 18 (d) the income earners 1 19 (b) to fall 1 Nominal EDP 20 Real GDP = 100 Price Inde 1½ 298

29 = Price Inde Price Inde = ½ (No marks if onl the final answer is given) 21 Fied Echange Rate is the echange rate fied b the government / central bank and is not influenced b the demand and sul of foreign echange. Fleible echange rate is the echange rate determined b the forces of demand and sul of foreign echange in the market and is influenced b the market forces: 1½ 1½ Managed floating echange rate is the fleible echange rate with intervention b the central bank through the market for foreign echange to reduce fluctuations in the rate. When foreign echange rate is too high, the central bank starts selling the foreign currenc from its reserves. When it is too low central bank starts buing foreign currenc in the market 'Borrowings from abroad' is recorded in the 'caital account' of BOP account because it increases international liabilit of the countr. It is recorded on the credits side because it brings in foreign echange into the countr. 1½ 1½ 23 As the banker to the banks, the Central Bank holds a art of the cash reserves of commercial banks. From these reserves it lends to commercial banks when the are in need of funds. Central bank also rovides cheque clearing and remittance facilities to the commercial banks. 4 The central bank is the sole authorit for the issue of currenc in the countr. It romotes efficienc in the financial sstem. It leads to uniformit in the issue of currenc, and it gives Central Bank control over mone sul

30 24 Mone sul has two comonents: Currenc and demand deosits with commercial banks. Currenc is issued b the central bank while deosits are created b commercial banks b lending mone to the eole. In this wa commercial banks also create mone. 2 Commercial banks lend mone mainl to investors. The rise in investment in the econom leads to rise in national income through the multilier effect Y = C + MPC (Y) + I 1½ 800 = (1 0.3)800 + I 2 I = = 140 ½ (No marks if onl the final answer is given) 26 (i) Pament of interest b a firm to bank is treated as a factor ament b the firm because the firm borrows mone for carring out roduction and therefore included in national income. 2 (ii) Pament of interest b bank to an individual is a factor ament because bank borrows for carring out banking services and therefore included in national income. 2 (iii) Pament of interest b an individual to bank is not included in national income because the individual borrows for consumtion and not for roduction. 2 (No marks if reason is not given) 27 Deficient Demand : is the amount b which the aggregated demand falls short of aggregate sul at full emloment level. It causes fall in rice level. 2 Bank Rate: is the rate of interest at which central bank lends to commercial banks for long term. The central bank can reduce deficient demand b lowering Bank Rate. When central bank lowers bank rate. Commercial banks also lower their lending rates. Since borrowing becomes cheaer, eole borrow more. This leads to rise in aggregate demand and thus hels in reducing deficient demand

31 Ecess Demand : is the amount b which the aggregated demand eceeds aggregate sul at full emloment level. It causes inflation. 2 Reverse Reo Rate : is the rate of interest aid b the central bank on deosits b commercial banks. Central Bank can reduce ecess demand b raising the Reverse Reo Rate. When the rate is raised, it encourages the commercial banks to ark their funds with the central bank. This reduces lending caacit of the commercial banks. Lending b the commercial banks to ublic declines leading to fall in aggregate demand Government can reduce inequalities through its ta and eenditure olic. Government can charge higher rate of ta from higher income grous b imosing higher rate of income ta and higher rate on goods and services urchased b the rich. The mone so collected can be sent on the oor in the form of free education, free medical facilities, cheaer housing etc. in order to raise their disosable income N.I. = (iv + i) + i + viii + (vi + vii + ii) - ii 1½ = = Rs Crore. ½ Private Income = N. I. + iii i + v 1½ = = Rs Crore (No marks if onl the final answer is given) ½ 301